Financial Reform Objectives at Odds with Effects of Rules
What’s a market maker to do when it can’t warehouse risk?
The options industry has a problem with bank capital rules. In this JLN video, Steve Crutchfield, head of market structure with CTC, discusses the burdens placed on market makers due to rules that are out of touch with the stated goals of post-crisis reforms, as well as structural issues within options markets.
There are only three major banks with a significant footprint in clearing for options market making firms. Those banks’ ability to conduct that business is under pressure from unduly restrictive capital rules that do not reflect the realities of the business — namely, that this is a risk-based industry and the rules are not risk based. The net impact is liquidity providers face an “artificial cap” on liquidity they can provide and the amount of open interest they can hold on their books.